I’m sure you guys love movies and TV shows. Every film is different from other films. They are unique (Forget the Bollywood thieves who make shabby remakes for this discussion). But if you think about it, every movie has similar plot components. There is going to a hero and a villain.
The hero faces setbacks, but then he finds someone who shows him the way. Then he works hard and eventually emerges victorious. This is the “idealistic” movie story.
Similarly, an “idealistic” way of how prices move exists. It is called the Wykoff Cycle*, and it says first there is some Accumulation where prices form a range. Eventually, the demand exceeds the supply, and in an uptrend, prices increase in what is called a markup. Then prices stay there for a while in a Distribution phase, again forming a range. Finally, the supply exceeds the demand, and in a downtrend, prices exhibit a markdown.
As every film is different, an “idealistic” story would only capture the broader themes, that too sometimes. To truly anticipate the next turn in the movie, we have to dig deeper. We have to look into the raw ingredients of the “idealistic” story: the hero, heroine, and villain. Yes, the hero would get badly beaten before he kicks ass. Yes, heroin and hero would hate each other before falling in love
For price’s “idealistic” story, the raw components are the uptrend, range, and downtrend. Whenever price shows some consistency in the way it moves, we can refer to that patch of similar price movement as the market structure. Uptrend, range, and downtrend are the types of market structure. Now allow me to make some logical deductions that might change your thinking on how the market moves.
Markets are the movie that never ends. Prices are always switching from one market structure to another. Range turning into uptrend turning into a downtrend turning into an uptrend and so on. Our job as traders is to make a bet when one market structure transitions into another.
There are only four scenarios that you can ever trade: A) When the trend continues B) When the trend reverses C) When the price remains in range (Support and Resistance holding) D) When the price moves outside the range (Support and Resistance failing). Every trade opportunity falls into one of them. In the upcoming chapters, you are going to learn how to use them!
So, yes. Knowing what would happen next in a film, spoils the fun. But the spoilers in financial markets make money. Learn on
*There is a lot of financial literature on this topic, Wykoff Cycle is one of the most famous ones, not the only one.